Bloomberg News

FGIC, Lehman, Madoff, A&P, Borders, Gateway: Bankruptcy

September 13, 2011

(This report contains items about companies both in bankruptcy and not in bankruptcy. Adds Alabama Aircraft Industries in Updates, Gentiva Health in Downgrade and section on Statistics.)

Sept. 13 (Bloomberg) -- FGIC Corp., whose prepackaged reorganization fell apart, reported having two and perhaps three proposals for a new Chapter 11 plan giving unsecured creditors more than the aborted plan.

FGIC will report on plan progress at a hearing Sept. 22 when it will seek an extension until Feb. 3 of the exclusive right to propose a Chapter 11 plan.

FGIC filed for reorganization in August 2010 with a plan under which creditors would become owners of the bond insurance subsidiary, Financial Guaranty Insurance Co. The plan became unfeasible when an exchange offer failed.

In a court filing last week, the company reported receiving offers from “two potential plan sponsors.” There also may be a third, FGIC said.

The offers would all give unsecured creditors more than the failed plan proposal, FGIC said. The terms of the proposals weren’t laid out.

FGIC is attempting to reorganize by using $4 billion in net tax-loss carryforwards. As before, FGIC’s assets consist of $10 million cash, the insurance subsidiary, and the opportunity to use the tax losses.

The plan developed before bankruptcy anticipated dividing the cash and new stock among lenders on the $46 million revolving credit and the $345 million in unsecured notes.

The holders of 90 percent of the common stock agreed to go along with the original plan and waive their $7.2 million unsecured claim.

FGIC’s petition in August 2010 listed $11.5 million in assets and $391.5 million in debt. Wilmington Trust FSB is trustee for the bondholders and JPMorgan Chase Bank is agent for the lenders.

The case is In re FGIC Corp., 10-14215, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Updates

Former Lehman Chief Fuld May Use Up $250 Million Policy

The Lehman Brothers Holdings Inc. hearing tomorrow is shaping up as the day when the bankruptcy judge will decide whether plaintiffs in some securities class actions have some recovery from Lehman’s $250 million directors’ and officers’ liability insurance policy while other class plaintiffs are left with nothing.

Former Lehman executives, including former Chief Executive Richard S. Fuld Jr., filed papers in bankruptcy court on Sept. 9 supporting their request for approval to use $90 million in insurance to settle a class suit for shareholders who bought stock or call options from May 2007 until Lehman declared bankruptcy in 2008. They say that the settlement will give Lehman a release from billions in securities claims.

An objection came from other former Lehman executives who were officers of bankrupt Lehman subsidiary Structured Asset Securities Corp. They anticipate that Fuld and others will use up the $250 million before they can come to court for authority to use $45 million in settlement of their suit.

The Fuld group argued in their papers that the so-called D&O policy isn’t property of Lehman’s bankruptcy estate. They also argue that the bankruptcy judge can’t force a sharing of the remainder of the policy because it should go to whomever comes to court first with a judgment to be paid or a settlement to be funded.

The Fuld group contends that Lehman benefits more from using limited insurance to cover the suit against parent-company executives. Without insurance, there could be a judgment against Lehman executives for billions. Absent insurance, the executives would have claims against Lehman based on the right of indemnification.

The Fuld group also contends that the SASCO suit should be covered by a later policy where the limits aren’t being exhausted. The SASCO defendants said that the insurance companies denied coverage under the later policy. The SASCO defendants want the bankruptcy judge to set up a “fair and reasonable allocation” of the remainder of the D&O insurance.

The confirmation hearing for approval of Lehman’s plan is set for Dec. 6.

The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold office buildings and the North American investment-banking business to Barclays Plc one week later. The remnants of the Lehman brokerage operations went into liquidation on Sept. 19, 2008, in the same court, with a trustee appointed under the Securities Investor Protection Act.

The Lehman holding company Chapter 11 case is In re Lehman Brothers Holdings Inc., 08-13555, while the liquidation proceeding under the Securities Investor Protection Act for the brokerage operation is Securities Investor Protection Corp. v. Lehman Brothers Inc., 08-01420, both in U.S. Bankruptcy Court, Southern District of New York (Manhattan).

Madoff Customers Claim Page-Limit Compliance in Rehearing Bid

Eight law firms representing 200 customers of Bernard L. Madoff Investment Securities Inc. filed papers on Sept. 9 asking the U.S. Court of Appeals in Manhattan to consider their request even though they exceeded the 15-page limit in the appellate court’s rules.

The law firms are seeking rehearing on a decision handed down Aug. 16 by a panel of three circuit judges concluding that the bankruptcy judge was correct in disregarding bogus account statements showing fictitious profits and securities never actually purchased. They wanted the case argued once again in front of all active circuit court judges.

When the customers initially filed a rehearing petition, it was rejected by the appeals court for exceeding the 15-page limit. After the customers attempted to meet the page limit by filing two petitions for rehearing, the Madoff trustee filed papers last week asking the judges to strike the petitions as an evasion of the length rule.

The customers responded on Sept. 9 by telling the circuit judges that they would have been within their rights if each of the law firms filed a separate 15-page petition. They see their petition as satisfying the rule, especially because the issue is of “national importance,” they said in their papers.

The Madoff trustee, Irving Picard, is hoping the 2nd Circuit in Manhattan will quickly deny the rehearing motion. He said in a separate filing that the rehearing effort on its own is preventing him from making an additional 11 percent distribution to customers.

Denial of rehearing may not be the end of the story. The customers still can file papers asking for review in the U.S. Supreme Court. Typically, the high court doesn’t act for several weeks. Consequently, the additional 11 percent distribution isn’t on the immediate horizon.

For a discussion of the appeals court’s August opinion, click here for the Aug. 29 Bloomberg bankruptcy report.

The Madoff firm began liquidating on December 11, 2008 with the appointment of the trustee under the Securities Investor Protection Act. Bernard Madoff individually went into an involuntary Chapter 7 liquidation in April 2009. His bankruptcy case was consolidated with the firm’s liquidation. Madoff is serving a 150-year prison sentence following a guilty plea.

The appeal is In re Bernard L. Madoff Investment Securities, 10-2378, U.S. 2nd Circuit Court of Appeals (Manhattan). The Madoff liquidation case is Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities Inc., 08-01789, also in Manhattan bankruptcy court. The criminal case is U.S. v. Madoff, 09-cr-00213, U.S. District Court for the Southern District of New York (Manhattan).

A&P Has Mediation Proposal for Billions in PI Claims

Great Atlantic & Pacific Tea Co., the supermarket operator, is proposing procedures for dealing with more than 2,600 personal injury claims. The proposal comes up for hearing in U.S. Bankruptcy Court in White Plains, New York on Sept. 26.

Resolving injury claims is complicated because A&P’s insurance policy has $750,000 in so-called self-insured retention, where the company must pay the first $750,000 before insurance kicks in. The picture is further complicated because bankruptcy law doesn’t allow bankruptcy judges to rule on personal injury claims.

A&P said in its Sept. 11 court filing that personal injury claimants are seeking $1.3 billion, although the amount could be larger because 500 of the claims don’t specify an amount sought.

A&P is proposing that the claimants and the company first exchange settlement offers. If there isn’t settlement, there would be a 60-day mediation period, unless the parties agree to binding arbitration.

If mediation fails, A&P would have the right to send the dispute to a state or federal court. A&P says it will allow suit to proceed if a claimant agrees only to receive payment from whatever insurance may be available.

Claimants would also be required first to utilize whatever third-party insurance is available.

To the extent claimants end up with settlements or judgments not covered by insurance, they would be paid like unsecured creditors under a Chapter 11 plan.

Montvale, New Jersey-based A&P filed for reorganization in December with 395 supermarkets. There are now 330 locations, the company said in a court filing. The stores are mostly in New York, New Jersey and Pennsylvania. A&P listed assets of $2.531 billion and debt totaling $3.211 billion. Along with A&P, store brands include Pathmark, Food Emporium, and Waldbaum’s.

The case is In re The Great Atlantic & Pacific Tea Company Inc., 10-24549, U.S. Bankruptcy Court, Southern District New York (White Plains).

Next Jump Claims It Was ‘Duped’ by Borders Executive

Although Next Jump Inc. agreed to stop using the customer list from the Borders Group Inc. rewards program, it countersued the liquidating book retailer on Sept. 9.

Next Jump recites how a Borders executive authorized switching Borders customers from the bookseller’s site, bordersrewardsperks.com, to a competing site owned by Next Jump. Borders then changed its mind and sued, Next Jump said.

Next Jump’s countersuit claims it was “duped” by Borders and “then lured it into a lawsuit in an attempt to monetize a significantly devalued asset.”

Next Jump is asking for damages to be decided at trial. The company says it took on a $1.8 million liability when it acceded to Borders’ initial request and shifted customers to its own rewards web site.

Borders, the liquidating book retailer, sued Next Jump on Aug. 31, alleging trademark infringement, among other things. On Sept. 6, Next Jump agreed to stop using the customer list.

Borders was authorized by the bankruptcy court last week to pay $125,000 in severance to each of the top four executives. Another 10 high-level executives would receive up to $1.25 million under a previously approved severance program.

Borders began going-out-of-business sales at all of its remaining locations on July 22. The creditors’ committee said before the liquidation began that Borders expected to generate $252 million to $284 million in cash from GOB sales. Borders arranged separate sales for the store leases and intellectual property.

Ann Arbor, Michigan-based Borders had 642 stores on entering bankruptcy in February and was operating 399 when the liquidation began. It listed assets of $1.28 billion and liabilities totaling $1.29 billion. Debt included $196 million on a revolving credit and $48.6 million on a term loan. Trade suppliers were owed $302 million for inventory.

The case is In re Borders Group Inc., 11-10614, U.S. Bankruptcy Court, Southern District of New York (Manhattan).

AAI Approved to Sell, Seeks Exclusivity until Dec. 12

Alabama Aircraft Industries Inc. was authorized last week by the U.S. Bankruptcy Court in Delaware to sell the business for $500,000 to Kaiser Aircraft Industries Inc.

The contract allows Kaiser Aircraft to pursue some lawsuits through a litigation trust, while giving 10 percent of recoveries to creditors of AAI.

Kaiser Aircraft, which funds the litigation trust, is a subsidiary of Kaiser Group Holdings Inc. The buyer also pays the cost to cure payments defaults on contracts and leases being taken over.

Kaiser will have two of three appointments to the advisory board for the trust. The bankruptcy court previously authorized sale procedures that didn’t produce an acceptable offer.

AAI filed a motion for an extension until Dec. 12 of the exclusive right to propose a Chapter 11 plan. The hearing on the motion is scheduled for Oct. 13.

Previously known as Pemco Aeroplex Inc., AAI had a long- term lease at the Birmingham International Airport in Alabama. It chiefly maintains and repairs military transport, tanker and patrol aircraft.

Pension Benefit Guaranty Corp. was listed as having the largest unsecured claim at $68.5 million. A fund affiliated with Tennenbaum Capital Partners LLC is owed $2.5 million on a note.

Assets were on the books for more than $32 million in September 2010, according to a court paper.

The case is In re Alabama Aircraft Industries Inc., 11- 10452, U.S. Bankruptcy Court, District of Delaware (Wilmington).

New Filings

Gateway Metro Building in Pasadena Files Chapter 11

The owner of the 11-story Gateway Metro Center office building in Pasadena, California, filed for Chapter 11 protection last week in Los Angeles after halting payments in May on a $21 million first-mortgage owing to Allstate Life Insurance Co.

The building has 121,500 square feet. It’s 60 percent leased, according to a court filing.

There will be a hearing on Sept. 12 for permission to use cash representing collateral for the Allstate mortgage.

The case is In re Gateway Metro Center LLC, 11-47919, U.S. Bankruptcy Court, Central District California (Los Angeles).

Scaffolding Installer Waco Files in Cleveland to Sell

Waco Holdings Inc., a designer and installer of scaffolding, filed a Chapter 11 petition on Sept. 9 in Cleveland for a sale of the business to competitor North American Scaffolding Inc.

North American acquired the first-lien debt that has an outstanding balance of $13.7 million.

Cleveland-based Waco has operations in five states. The loss of $2 million on the bankruptcy of the uncompleted 63-story hotel in Las Vegas owned by Fontainebleau Las Vegas LLC precipitated the first default on secured debt.

Waco’s revenue in 2010 was $36.7 million.

The case is In re Waco Holdings Inc., 11-17843, U.S. Bankruptcy Court, Northern District Ohio (Cleveland).

Watch List

Jefferson County Commissioners to Meet Sept. 16 on Bankruptcy

Commissioners for Jefferson County, Alabama are scheduled to meet again on Sept. 16 to consider filing what would be the country’s largest municipal bankruptcy reorganization.

For Bloomberg coverage on the status of talks with creditors, click here.

The discussions concern how much of a haircut creditors will accept on $3.1 billion in defaulted sewer bonds. Jefferson is the state’s most populous county. It includes Birmingham.

Downgrade

Gentiva Health Demoted to B1 Corporate by Moody’s

Gentiva Health Services Inc., an Atlanta-based provider of home health and hospice services, received a downgrade yesterday from Moody’s Investors Service lowering the corporate credit by one grade to B1.

The $325 million in 11.5 percent unsecured notes due 2018 also went down one click to B3.

Moody’s based its action on lower Medicare reimbursement rates and new regulatory policies, such as the face-to-face physician requirement.

Gentiva has 450 locations in 42 states that generated $1.7 billion in revenue for the year ended in June, Moody’s said.

The unsecured notes traded yesterday at 80.5 cents on the dollar, to yield 16.3 percent, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority. The stock closed yesterday at $6.82, up 17 cents on the Nasdaq Stock Market.

The company reported net income of $18.6 million for the first half of 2011 on revenue of $915.8 million. For 2010, net income was $52.2 million on revenue of $1.48 million.

Statistics

Student Loan Defaults Rise to 8.8% in Fiscal 2009

Defaults on student loans rose to 8.8 percent in fiscal 2009 from 7 percent in fiscal 2008, the U.S. Education Department reported.

The government’s statistics tend to understate the default rate because it counts only those loans that were 270 days behind and first came due during the fiscal year.

For loans made to finance an education in a for-profit institution, the default rate was higher still, at 15 percent for fiscal 2009. The year before, it was 11.6 percent.

Student loans typically cannot be discharged by filing for bankruptcy, unless repaying the loan would prevent the bankrupt from having a “minimal standard of living.”

The default rate was the highest since 1997. The record was 22.4 percent default rate in 1990. For Bloomberg coverage, click here.

Daily Podcast

Distressed Debt, Solyndra, Philly Orchestra: Bankruptcy Audio

The dramatic month-over-month increase in junk debt trading at distress prices is the first topic on the new Bloomberg bankruptcy podcast. Bloomberg Law’s Lee Pacchia and Bloomberg News bankruptcy columnist Bill Rochelle look for reasons why the Federal Bureau of Investigation raided the offices of Solyndra LLC, a manufacturer of cylindrical solar systems for commercial rooftops. A decision by musicians to mediate over a new contract with the Philadelphia Orchestra leads Rochelle to wonder if agreement is near. A ruling by a bankruptcy judge in New York stands as warning to the mortgage-lending industry that courts will catch shortcoming in paperwork even if the homeowner doesn’t. The podcast wraps up with a look at the gamble that homebuilder Hovnanian Enterprises Inc. is taking on a comeback in the housing market. To listen, click here.

--With assistance from Bob Drummond in Washington; Margaret Newkirk in Birmingham; Kathleen Edwards and Martin Z. Braun in New York; and Dawn McCarty and Michael Bathon in Wilmington, Delaware. Editors: John Pickering, Mary Romano

To contact the reporter on this story: Bill Rochelle in New York at wrochelle@bloomberg.net.

To contact the editor responsible for this story: John Pickering at jpickering@bloomberg.net.


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